● Growth contraction in the Industrial Production Index (IPI) eased in June, beating expectation (-0.4% YoY; house estimate: -16.5%; consensus: -10.4%; May: -21.6%)

− Attributable to the resumption of economic activities in line with economic reopening as Malaysia enters the Recovery Movement Control Order (RMCO) phase from 10 June until 31 August. − MoM: rose sharply to a record high (26.2%; May: 18.9%).

− 2Q20: growth plunged following strict measures to curb COVID-19 outbreak (-17.9%; 1Q20: 0.4%).

− 3-mma: contraction eased (-17.9%) after a record fall in May (May: -19.4%).

● Manufacturing index rebounded (4.7%; May: -22.6%), in line with the growth in manufacturing sales (4.1%; May: -20.4%)

− Led by a rebound in the production of electrical & electronic products (13.2%; May: -11.2%), petroleum, chemical, rubber & plastic products (1.6%; May: -21.9%), and transport equipment & other manufactures (10.7%; May: -38.5%) as government allowed more industries to resume operations. − MoM: rose sharply (36.8%; May: 27.0%), reflecting an extended resumption of manufacturing activities.

● Mining index fell for the fourth straight month but at a slower rate than the previous month (-17.1%; May: -22.2%)

− Broad-based slowdown, led by extraction of crude petroleum (-21.1%; May: -22.2%) and followed by natural gas (-13.5%; May: -22.2%).

− MoM: expanded for a second straight month (2.4%; May: 0.4%), in line with the improvement in the global oil price (USD40.3/barrel; May: USD29.6).

● Electricity index fell by less (-2.4%; May: -10.3%) as factories resumed operations and partly due to lower base effect

− Growth is expected to expand further in the coming months in line with the RMCO phase and expected recovery in economic activities.

● Recovery in industrial production to extend in the near term in line with the RMCO phase

− The implementation of the RMCO, along with the ongoing fiscal stimulus injection and monetary easing by the Bank Negara Malaysia, as well as favourable domestic COVID-19 development, are expected to lift consumer and business sentiment. However, the broad weakness in external demand and fears of the resurgence of COVID-19 infection is expected to weigh on the growth recovery momentum.

− Given the 2Q20 IPI growth plunged in line with our expectation of severe impact of the COVID-19 pandemic, we retain our base estimate of 2Q20 GDP growth of -7.5% (1Q20: 0.7%). Meanwhile, we reiterate our 2020 projection of a -7.7% growth (2019: 3.6%) in the manufacturing production index, consistent with the expected decline in GDP (-2.9%; 2019: 4.3%) for this year.

Source: Kenanga Research - 10 Aug 2020